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Wednesday, October 19, 2011

I'm Sorry

Time For Wall Street To Apologize

Each day, the Wall Street protests grow. Over the weekend, demonstrations spread to dozens of U.S. cities and three continents, with scores of arrests and increasing violence.Sympathizers in Rome went on a rampage that caused more than $1 million in damage.

The revolt against Wall Street is about many things: Disgust with the broader economy, anger at government gridlock and policy failures, revulsion over bank bailouts, resentment about the growing gap between rich and poor, and generalized rage at the machine. There is also legitimate fury for Wall Street’s role in the misery many are experiencing.

Everyone Needs To Fess Up

The Wall Street establishment clearly needs to do something. After all, the “Occupy Wall Street” movement has its name on it.

What should be done? First, Wall Street needs to atone for the sins that got us into this mess. A mea culpa is due because Wall Street’s multi-billion dollar propaganda machine effectively peddled the worst kind of fantasy – that individuals and institutions who invest with them can achieve superior returns using their newly created“AAA” investments.

Unfortunately, the only people who made money were those who took the other side of the trade.Given that investing remains a zero sum game, not even Wall Street could change the laws of finance.

Wall Street firms need to start with an apology to anyone who ever purchased these new investment products and opened an investment or retirement account with dreams of a predictable financial future.

Advisors Share The Blame

Second, an apology is due from advisors. They believed their bosses who prodded them to sell the delusion that Wall Street’s best and brightest had figured out a way to squeeze addition return out of AAA-rated securities.

Brokers and advisors didn’t need much convincing to get them to go along. To address the fee compression caused by new regulations, wealth professionals looked for additional revenue opportunities by selling these opaque but “safe” investment vehicles.

So Do Clients

Third, clients themselves need to make amends. Their own demands for a safe but outsized return fueled the mania.Investors had come to expect outsized returns during the 20+ year bull market and had established a lifestyle to assume the good times would continue forever.

Clients relentlessly requested high returns and threatened their advisors that they would pull their accounts if their demands weren’t met.

The Way Forward

Once the apologies are made, Wall Street needs to tell it straight.

For starters, Wall Street needs to explain that the new normal for equity returns is likely to be 6% to 8%. That’s a sharp departure from the 10% to 12% growth that led some to believe their wealth would double every seven to 10 years.

In the short term, even the 6% to 8% growth is suspect. Those kinds of returns should be viewed as an intermediate term goal, if we’re lucky. As The Economist noted this week in its cover story, Nowhere to Hide, there aren’t many places to invest these days. The perils include the foundering U.S. economy, still-deteriorating housing market, European crisis, and the slowdown in emerging economies.

In addition to systematically lowering expectations, Wall Street also has an obligation to be more transparent. It desperately needs to fix its broken business model and return to a business that charges a disclosed fee for advice and raising capital.

If Wall Street doesn’t make it right, it will only accelerate the independent advisor movement. That may be the sliver lining after all. We believe strongly that leaving Wall Street is the best option for both investors and advisors.

For their part, clients need to find an advisor at a firm whose business model they can trust for the long term. Parking money in cash is only a short-term solution.

More truthfulness and an apology will be a good start in repairing the damage. Coming clean will also show protesters – and the rest of the America – that Wall Street acknowledges that it must do better.

5 comments:

Anonymous
said...

I would go further and ask (rhetorically) whether anyone who pitched the products you referenced and/or offered equity return expectations in the double digits years ago is qualified to act as an investment advisor. If they could not see the problems then what makes you think they could identify the next problem?

I just read your excellent article, "I'm Sorry." I rather doubt you will have many takers, but it certainly speaks well of you and your honest approach to a business that is, after all, based entirely on mutual trust. It reminds of a story about the great Mr. J. P. Morgan. In his last years Morgan was interrogated by a congressional committee, and asked if money was not the basis of commercial credit. "No sir," he replied, "the first thing is character.... a man I do not trust could not get money from me on all the bonds in Christendom."

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About Jeff and Keith

Jeff has over 25 years experience in wealth management as a family advisor and a national manager of the wealth management businesses at Montgomery Securities, Bank of America Private Bank, and Presidio Financial Partners LLC.

Keith has over 25 years of experience in the financial services industry, including 10 years as the chief operating officer for several hedge funds. He was the COO and founding partner of East Avenue Capital Partners, Neuberger Berman Technology Management and Bowman Capital Management.

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